Suppose your dear old Grandfather approaches you for investment advice. He knows
ID: 2646412 • Letter: S
Question
Suppose your dear old Grandfather approaches you for investment advice. He knows of your great training in finance and statistics and gives the following instructions: "I have lived a long time and through many challenges. But the recent financial upheaval, with its ups and downs, is too much for me to bear. Just pick for me a portfolio with the least risk." Suppose there are portfolios (A, B, and C) to choose from, and next year the economy will be in an expansion, normal, or recession state with probabilities 0.33, 0.42, and 0.25, respectively. The returns (%) on the securitiies in these states are as follows: Portfolio A {expansion = +17.77, normal = +11.50, recession = +6.50}; Portfolio B {+12.00, +7.50, +4.50}; Portfolio C {+13.50, +9.50, +5.00}. Which investment best fits your grandfather's needs?
a)Portfolio C.
b)Portfolio A.
c)Portfolio B.
d)Insufficient information to make the decision.
Explanation / Answer
Answer :-
(Portfolio - A) { 2 stands for square}
Standard Deviation (?) = ??(Return - Avg. Return)2 * Pi
= ? 18.55
= 4.307
(Portfolio - B) { 2 stands for square}
Standard Deviation (?) = ??(Return - Avg. Return)2 * Pi
= ? 8.40
= 2.898
(Portfolio - C) { 2 stands for square}
Standard Deviation (?) = ??(Return - Avg. Return)2 * Pi
= ? 10.31
= 3.211
{ Portfolio - B is the Best because its Standered Deviation is less than the Portfolio-A & Portfolio-C}
Economy Probability (Pi) Return (R) Average Return (R * Pi) (Return - Avg. Return)2 (Return - Avg. Return)2 * Pi Expansion .33 17.77 (17.77*.33) =5.86 (17.77-12.32)2 =29.70 (29.70*.33) =9.8 Normal .42 11.5 (11.5*.42) =4.83 (11.50-12.32)2 =.67 (.67*.42) =.28 Recession .25 6.5 (6.5*.25) =1.63 (6.5-12.32)2 =33.87 (33.87*.25) =8.47 TOTAL 1 12.32 18.55Related Questions
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